Builders broke ground on fewer single-family homes last month, as the new-home market continues to drag and struggle to compete against the flood of foreclosures and short sales that are bringing home prices down. 

The Commerce Department reported Tuesday that housing starts dropped 1.5 percent to a seasonally adjusted annual rate of 604,000 homes in July. Economists say that is only half the 1.2 million new homes per year needed for the country to sustain a healthy housing market.

In July, single-family homes, which make up the biggest bulk of home construction, dropped 5 percent. 

One bright spot still holding on in new construction: Multi-family housing starts increased 7.8 percent as rental demand grows. Groundbreaking for new multi-family projects with five or more units reached its highest point since January. 

However, new building permits--a gauge of future home construction--dropped 3.2 percent. 

The new-home sector continues to be depressed due to high competition from foreclosures and short sales that sell for ultra low prices. The median price of a new home is more than 30 percent higher than the median price for an existing home, analysts say.

Meanwhile, builder confidence remains low, holding unchanged this month, according to an index by the National Association of Home Builders that was released Monday. Industry sentiment was unchanged at 15, only seven points above the lowest reading on record in January 2009. (Any reading below 50 indicates negative sentiment about the housing market.)

"Builders continue to confront the same major challenges they have seen over the past year, including competition from the large inventory of distressed homes on the market, inaccurate appraisal values, and issues with their buyers not being able to sell an existing home or qualify for favorable mortgage rates because of overly tight underwriting requirements," Bob Nielsen, chairman of NAHB said in a statement. 

Source: “Big Losses in Single-Family Home Building Offset Gains in Apartment Construction,” Associated Press (Aug. 16, 2011) and “U.S. Housing Starts Fall Less Than Expected in July,” Reuters News (Aug. 16, 2011)

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